As retailers increasingly realize that offering rewards and discounts attracts customers and keeps them coming back to stores and websites, the need for providers of gift, loyalty or rewards programs is only growing, according to a SparkBase white paper.
In How To Improve Your Bottom Line: 4 Steps to Develop a Successful Gift Card, Loyalty or Reward Program Merchants Want, the stored-value card processor cites the American Express OPEN Small Business Monitor, which reported the largest driver of merchant revenue growth in 2011 will come from customer demand for such programs. Thirty-eight percent of merchants surveyed said implementing rewards or loyalty programs topped their to-do list in 2011.
"The fact is consumers want stored-value programs, and over the next 12 months, we will see rapid adoption by small to midsize merchants as they rush to take advantage of this opportunity," SparkBase said. "The only question is, Who will provide the merchants their program?"
SparkBase outlined three ways ISOs can go about implementing a stored-value program. The avenue that requires the least investment is to resell a vendor's branded product. But minimal investment means minimal return on investment, SparkBase said, because ISOs would only receive a small percentage of total revenues generated by the program, with the vendor enjoying the lion's share of the profits.
The second business model is for ISOs to develop in-house programs. In this scenario, the ISO has its information technology department build a processing platform or contract the job out to an independent software developer. The upside for ISOs operating their own in-house systems is that they control the technology and realize greater revenues.
However, development of in-house systems costs time and money. SparkBase said development time usually runs seven to nine months and may cost over $1.5 million – an initial investment that doesn't take into account the need for system upkeep and innovation over time.
The third option is for ISOs to "white-label" third-party vendor programs. In this model, the vendor operates the program behind the scenes, while the program is branded and marketed to merchants as the ISO's own program. SparkBase said ISOs that go this route control merchant pricing and can expect to see margins in the 70 percent range.
"Of the three options covered … white-labeling an existing network has the highest incremental rate of return, as it limits the capital investment required for start-up and ongoing overhead while increasing speed to market and still delivering control of the merchant experience," SparkBase said.
The value proposition of stored-value programs is multifaceted. For small and midsize businesses competing with big-box retailers for customers, ISOs offering sophisticated stored-value programs can help "level the playing field," SparkBase said. Stored-value also reduces merchant attrition, since merchants are less likely to switch processors if an ISO's high performing gift or loyalty program boosts the merchant's bottom line, the processor added.
Above all, well crafted stored-value programs drive new customers to merchants and encourage repeat business from existing customers, according to SparkBase. "ISOs have an opportunity to take advantage of a fundamental merchant need: increasing consumer traffic and spending," the processor said. 
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